Europe is really now Germany when talking about the Euro. Germany hates inflation and wants a high Euro/US$. The USA exports all over the world and wants a low Euro/US$ exchange. Germany's exports are mostly to other EU countries and doesn't care about a low Euro because the other import countries use the Euro as well. What Germany needs, other than a high Euro for controlling inflation, is to get that Southern Europe, mainly Spain, has enough power to buy Germany's services and goods. This is luck for Spaniards who are just there to buy whatever Germany serves them: Hot or Cold.

The problem of the economist is that it should change its name to the financialist. These so called economists does not know much about economy, but base their speculation, fears, assumptions and fear spreading based on stock markets and politics.

Eyes seem to have turned a bit towards the dollar zone, which have been my focus all the time. An economy that have had a remarkable collapse, going from 4.2% unemployment to a stable 9.5%ish unemployment. Furthermore it has more government debt than the Eurozone and is not doing auterity, but taking on unprecedented amount of new debt, with no talk of paying it back. In addition, its printing worthless money to exhaggerate the problems of overpriced property, which is finally about to cool down and decline in value. Property for one is way overpriced in the western world, and the true value of property, should be as little as 25% of current values to represent fair value compared with wages. The US care little about this and is pursuing a policy of increasing housing prices, thus decreasing living standards for everyone, and depressing the rest of the economy, by swallowing up parts of the productive economy, and putting it into unproductive loans and the inflated property market. The US seems to desperately want to stop property prices from falling, even though living standards will fall, and more of the consumption economy will go to the banks and their theft of pruductivity.

High unemployment, compared to Germany who have had a falling unemployment level the last 5 years. About equal to Europe, but far less stable, and unlikely to improve. More poverty and less economic backup for the poor is contributing to all those poor being unproductive for the economy, unlike in Europe, where they are kept somewhat productive for economic activity.

Enoumous waste and spending on the military and the highest total new debt for years to come, will add to the pressure on the federal buget and deficits.
More focus on cunsumption and value stealing industries like banks and finance is not a good thing either, when comaring to industrial production and manufacturing like in Europe. Exports in Europe brings in a solid stream of foreign reinvestment of money that Europe have leveraged all over the world, while in the case of the US low exports as part of their economy and quite high consumption(not that much higher than Europe), leads the US on a path towards owing everything everywhere, and not leveraging trade in ownership of value around the world.

The fallacy of the Eurosceptics is that the differences in the Eurozone will have negative impact, when it actually is having positive impact in evening out those economies, and forcing them to reform in different ways than devaluations, which like the word says, devalues the actual economy, to prop it up to look nice, rather than actually improving it. In addition, everything negative that is happening is a basis for change in the Eurozone, as like the EU always changes with the circumstances rather than being totally static and unchangable like the US government and the dollar sone.

I do fear the eyes turning towards the dollar the the pound, it will, and the consequences will be quite awful, especially when a whole country collapses, instead of just parts of a currency sone.
There is no need to talk about a second civil war yet, but if things continues like this in the US, the end result can be nothing but it.

IMO one of the beauties of the Eurozone is exactly the fact that threre is no central government, no central fiscal policies, etc...

The country that gets too much indebted will have to pay more to its bondholders. What is at stake is the ability of the borrower to pay his creditors, not the strength or weakness of the currency.

Even if any of the "profligate" states defaults on its payment, what does the Euro have to do with it? This is a creditor-debtor issue, not a currency issue, no matter how hard Americans and English try to connect one issue with the other.

First of all, I doubt that any of those countries will default on their debts. In the end, the creditors will have made an excellent deal.

Secondly, Chinese, Brazilians, Germans etc... are much better off keeping their foreign currency reserves in Euros, than in US$. The US$ is way too overvalued and, yet, the FED in a complete oblivion to that fact is printing money like hell, further deteriorating its real value.

Thirdly: Who wants to keep US$? Not even those who benefit from the "Quantitative Ease" printouts. As soon as those American financial instutions get a hold of the freshly minted US$ they hurriedly get rid of them buying any other currency in the world, buying Brazilian reais, Thai bahts, Malayan ringits, Japanese yens, etc... forcing those currencies to sky rocket vis a vis the US$.

Fourth: You can bet that one of the reasons why the Euro maintains its high value is partially due to the fact that many Americans, who are distrustful of the future of the US$, are buying Euros correctly thinking the Euro is much more secure than the greenback.

Fifth: the market forces are much more convincing in terms of forcing a "profligate" state to quickly turn away from being "profligate" than any central government, like the Federal US government.

The markets themselves will force the highly indebted countries to adopt more severe fiscal/trade policies.

The beauty of the Euro rests exactly on what several "Euro detractors" try to convey is the Euro's defficiency, i.e., no central government ruling individual fiscal policies.

Central governments are very prone to making severe mistakes, the markets, sooner or later will force things to get straightened out.

Maybe, key reason for euro strength to dollar, in spite sovereign debt crisis, is abnormal, record, FED monetary relaxation (expansive fiscal policy is similar problem for both US and EU). US has big deficit of balance of payments, while EU is roughly in equilibrium. US technological advantage comparing to EU is big, as well as, ability to make active economic policy, especially during the crisis.

The Euro is doomed as a piggy currency because the Big club-by boys are very opposed to issuing the Euro bonds which will reduce the debts of the PIGS but increase their own borrowing costs. So far, the Anglos had all but ditched the Euros with only the Chinese is interested in propping it up.

The euro is doing fine because rumors of its imminent demise originated largely from the media, pundits and financial institutions of its direct economic rivals, i.e. the US and UK.

That was a speculation ploy as much as a last ditch effort to crowd in investment in Treasuries and Gilts. But it has backfired for the very reasons many of the euro critics see as its fundamental flaws:

First, rising yields of peripherals correspond to lower yields of core countries, increasing spreads but diminishing the crowding out effects of 'safe haven' flows to dollar and pound.

Second, the artificially weakened euro unleashed the export might of the European core on the rest of the world, resulting in high growth that is only partly reflected in a stronger currency.

Third, 'austerity' imposed on overindebted countries with a large public sector does not necessarily translate into lower economic growth. In fact, given their bloated bureaucracies and social security systems, austerity will likely contribute to increased efficiency and private sector initiative, rather than eat into economic growth as it would in economies with a smaller public sector, like the US's or the UK's.

Meanwhile, the Chinese are slowly offloading US Treasuries (which is why long yields are rising despite QE2) to ensure a soft landing, converting their dollars into euro denominated debt, thus strengthening the common currency.
Lesson: In the medium term, fundamentals always trump sentiments.

To the dismay of the Hedgefunders and US Banksters, the Euro has not gone right through into the dump where they are placing their big bets because the Chinese had been busy buying up the Greek, Spanish and other Piggy bonds. Now the Vice-Premier is touring the region thereby assuring the nervous investors that he will buy even more to prop up the piggy Euros.

In case of Euro, it strength is more related to the cronical problems with other currencies (USD, GBP and JPY) but its own vitality. Yes, The Pigs are going down the drain, but do you really think The US Treasury will pay back the last nickle of its current debt in its current value?

I would expect the Euro to appreciate even more this year, at least relative to the US Dollar, seeing as Axel Weber will most likely be the next ECB president and the US just made a strong statement of trying to spend their way out of debt.

Furthermore I have my doubts as to how much other big economies such as China or Brazil will let their currencies rise and therefore hamper their exports to the markets of the EU. So even if the debt crisis festers further, and more countries are forced to accept the help of the EU-bailout mechanism, I would still expect Euro long to be a profitable position to hold.

We should regard the aggregate credit of the euro as ultimately the aggregate credit of the currencies that have been abolished to be transferred to the common currency.

When an economy is to join the Eurozone, it has to obey the strict fiscal and monetary thresholds set by the ERM2 programme. Naturally, this discipline ultimately maintains the credit of the national currency high until the economy introduces the euro.

Even after it joins the Eurozone, it has to keep the fiscal discipline. Indeed, Eurozone economies are recently violating the fiscal deficit threshold, but they are still forced not to deviate a lot by the European Commission. No single member state is allowed to begin issuing its own weak currency. Ultimately, this adds a certain credit to the common currency. This additional credit is ultimately a compensation for the pains that the economically failed nations are suffering. Some of the pains are statistically calculable, and others not, as Keynes and Austrians suggest about uncertainty. But, market participants try to guess where the equilibrium, which Arrow and Debreu proved exist somewhere like Scrodinger's cat in quantum mechanics, is to make decisions. A lot of market participants can find directions at least, and they say the euro must be expensive, not really sure how expensive it should be.

Only are sovereign debt crises more visible than if the states were more united. In practise, California, with rapidly ballooning debts to its GDP, could be in a more critical situation than Portugal is. Portugal’s blunder would be regarded as a debt crisis of sovereign state while California’s would never. Markets, and probably the Californians, have no doubt that the Federal authorities will bail out the pampered state after all. This means that markets are trying to devalue the dollar that much. But, media prefer reporting about a few economically failed Eurozone members to California.

The golden principle that the aggregate credit of the member states economies decides the credit of the common currency is naturally applied both to the Eurozone and United States. That’s why the euro is being appreciated higher than the US dollar today.

It seems surprising that a discussion about the relative price of different monies hardly mentions monetary policy, which should be one of the first place to look for the cause of exchange rate movements.
Given the quite tight monetary policy of the ECB - which never let its main rate get lower than 1% while the Federal Reserve was despairing because it could not push its interest rate negative - we would expect nothing else than an appreciated Euro.
It seems that the domestic price of money would be a better explanation for the external price of money than anecdotal accounts of competitiveness or the educational health of a society.

I was wondering if the Economist could do an article on Portugal. Having read and visited the country I dont fully understand why it has higher bonds than italy or spain. Portugal already has a pension age the increases with life expectancy and seems to be very liberal in many respects. Therefore the question is: why is portuguese growth so low, hence leading to the high bonds? What must portugal do to increase growth and lower the bond rate?

On reflection, I was too sharp with pedrolx. In other posts (not this one), he has given actual data comparing Portugal with other nations, giving reasons why he thinks that Portugal should not be lumped in with Ireland and Greece. Nobody (that I have seen) has refuted his data.

The bond market may not agree with pedrolx's position, but at least he has reasons for holding it. I still can't agree with his "blame the media" approach, and the repetition gets annoying, but I was too harsh on a guy who has an unrebutted position with data, and perhaps too harsh for politeness in any event.